30 June 2016

Hungary’s external balance indicators continued to improve slightly in 2016 Q1. The annual surplus on the current account balance continued to increase, while net lending stabilised at a high level of nearly 9 per cent of GDP. In parallel with the reduction in external debt ratios, short-term external debt also declined, and foreign exchange reserves still significantly exceed the level expected by investors.

Net lending stabilised at a high level due to the rising trade surplus and the improving income balance, which was counterbalanced by the decline in the transfer balance. Partly as a temporary effect of the factory shutdowns early in the year, the growth rate of exports fell short of import growth, but due to moderate energy prices, the trade surplus increased in the context of improving terms of trade. As a new programming period has started, the utilisation of EU transfers during the quarter was low, similar to the first years of the new periods. The income balance deficit shrank, which can still be attributed to interest expenses falling on account of the declining external debt and lower interest rates.

Net FDI inflows continued in early 2016, while the reduction in net external debt decelerated. The sectoral distribution of net external debt was strongly influenced by the fact that during the quarter the central bank provided liquidity to the banking system in the amount of EUR 3 billion in connection with the forint conversion of foreign currency loans. As a result, banks’ net external debt fell considerably, while that of consolidated general government rose. The continued sale of government securities by non-residents further reduced the gross external debt of the state. Households’ financial savings fell slightly in the first quarter, but the government securities holdings of households gained more ground, which continued to support the reduction in the government’s external debt. Due to the expansion of revenues from consumption and wages and the falling interest expenses, the net borrowing of the state dropped below 2 per cent, thus remaining at a historically low level.

Net and gross external debt ratios continued to decline in early 2016: net external debt relative to GDP shrank to around 24 per cent, while gross external debt fell to around 74 per cent at the end of March. In parallel with gross external debt, short-term external debt – which is key from the risk perception of the country – also continued to fall, dropping to around EUR 20 billion. Foreign exchange reserves declined to EUR 27.6 billion in the first quarter, still far exceeding the reserve indicators which are closely monitored by investors.